Obama Hits a Bailout Iceberg

Does Obama have a Geithner problem? (Chip Somodevilla/Bloomberg News)

The public furor over the outrageous bonuses granted to AIG executives isn't exactly misdirected. It's just that the bonuses are really only a minor symptom of a major problem that President Obama has yet to sufficiently address.

As part of its massive financial bailout program, the federal government has spent $180 billion on AIG, and now owns 80 percent of the company. But the company's CEO still decided to pay out $165 million in bonuses -- to some of the very people most responsible for the cataclysm we face today.

Why couldn't the government stop this? Well, it's still not entirely clear just how hard the White House and the Treasury Department really tried. But this wouldn't have been an issue if we had simply taken AIG over outright.

Yes, we need to know more about the White House decision-making process here. But more to the point, President Obama needs to make it clear to the American people -- if he can -- why these banks and insurance companies shouldn't be under the direct control of the taxpayers who have spent so much money bailing them out.

And, yes, we know that Obama's top economic advisers tell him that's not a good idea. But he needs to explain why he believes them. And even more so, he needs to explain -- if he can -- why he thinks the growing number of outside economists who think that short-term nationalization is the only reasonable answer are wrong.

Washington Post opinion columnist Harold Meyerson argues this morning that Treasury Secretary Tim Geithner is the problem, and that "Geithner's indulgence of bankers' indulgences is fast becoming the Obama administration's Achilles' heel. The AIG debacle is the latest in a series of bewildering Geithner decisions that threaten to undermine the administration's efforts to restart the economy. So long as it's Be Kind to Bankers Week at Treasury -- and we've had eight straight such weeks since the president was inaugurated -- American banking, and the economy it is supposed to serve, will remain paralyzed. The Geithner plan to restart the banks provides huge taxpayer subsidies to hedge funds, investment banks and private equity companies to buy the banks' toxic assets without really having to assume the risk. That's right -- the same Wall Street wizards who got us into this mess, using the same securitization techniques that built mountains of debt within a shadow financial system that remains unregulated, are the saviors whom Geithner has anointed to extricate us -- with our capital, not theirs -- from the mess that they created.

"A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them."

It seems to me now would be a good time to review some of the earlier arguments for nationalization.

Let's see. Here's New York Times opinion columnist (and Nobel Prize winning economist) Paul Krugman: "First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn't expect the government to rescue them if necessary.

"Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can't risk letting much bigger institutions like Citigroup or Bank of America implode.

"Third, while banks must be rescued, the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders....

"How would nationalization take place? All the administration has to do is take its own planned 'stress test' for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary...

Here are Matthew Richardson and Nouriel Roubini writing in a Washington Post opinion piece: "As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.....

"Nationalization -- call it 'receivership' if that sounds more palatable... is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end."

Here's former Clinton labor secretary Robert Reich writing for Talking Points Memo: "The real scandal of AIG isn't just that American taxpayers have so far committed $170 billion to the giant insurer because it is thought to be too big to fail -- the most money ever funneled to a single company by a government since the dawn of capitalism -- nor even that AIG's notoriously failing executives, at the very unit responsible for the catastrophic credit-default swaps at the very center of the debacle, are planning to give themselves over $100 million in bonuses. The scandal is that even at this late date, even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money....

"To whom should they be accountable? As long as taxpayers effectively own a large portion of them, they should be accountable to the government.

"But if our very own Secretary of the Treasury doesn't even learn of the bonuses until months after AIG has decided to pay them, and cannot make stick his decision that they should not be paid, AIG is not even accountable to the government. That means AIG's executives -- using $170 billion of our money, so far -- are accountable to no one."

And for good measure, here's that radical former Fed chairman Alan Greenspan, talking to the Financial Times a month ago: "It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring.... I understand that once in a hundred years this is what you do."

"Well, you know, it's interesting," he said "There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called 'The Lost Decade.' They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.

"Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [He laughs.] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country."

But as Krugman responded in his blog: "Yes, we have thousands of banks — but the problems are concentrated in a handful of big players. In fact, the Geithner plan, such as it is, already acknowledges this: the 'stress test' is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.

"And the argument that our culture won't stand for nationalization — well, our culture isn't too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out."

Meanwhile, for good measure, the AIG scandal is making Geithner's preferred alternative to nationalization even more problematic. David Cho and Binyamin Appelbaum write in The Washington Post: "The firestorm over bonuses paid by insurance giant American International Group has triggered alarm at other financial firms, threatening federal efforts to draw private investors into economic recovery programs.

"It is a critical juncture for the Obama administration. Officials at the Federal Reserve and the Treasury Department are increasingly worried that the controversy could discourage investors from joining a new government effort to revive consumer lending as well as a separate plan that relies on private money to buy toxic assets from banks, sources familiar with the matter said. Treasury officials planned to outline that second program as early as this week."

So. What about what the White House knew and when?

Shailagh Murray, Paul Kane and Michael D. Shear write in The Washington Post: "Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward."

Julie Hirschfeld Davis writes for the Associated Press: "So far, the administration has been unable to match its actions to Obama's tough rhetoric on executive compensation....

"While administration officials insisted Tuesday that neither Obama nor Geithner learned of the impending bonus payments until last week, the problem wasn't new. AIG's plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored. A November SEC filing by the company details more than $469 million in 'retention payments' to keep prized employees.....

"Around the same time, Congress and Obama's team were passing up an opportunity to put in place strict laws to revoke bonuses from recipients of the $700 billion Wall Street bailout."

Davis also adds one key element to the timeline: "Unprompted, officials leaked news of the bonuses to select reporters late Saturday afternoon, highlighting what Geithner had done to try to restrain the payments. The story quickly became fodder for the Sunday news talk shows."

Should the White House have let those checks go out in the first place? More and more experts say no.

New York Times business columnist David Leonhardt this morning suggests ideas for "how to change the rules on corporate pay to reduce the odds of future crises. Throughout this crisis, policy makers, starting with President George Bush and Ben Bernanke and now including President Obama, have been a bit too deferential to Wall Street. That deference has fed populist anger, which threatens the political viability of the necessary continuing bailout of the credit markets."

Maureen Dowd writes in her New York Times opinion column: "The president needs to brush back the arrogant, greedy creeps who kneecapped capitalism, rather than cosseting Wall Street for fear of looking like an avatar of socialism."

"Around the same time, Congress and Obama's team were passing up an opportunity to put in place strict laws to revoke bonuses from recipients of the $700 billion Wall Street bailout."

Chris Dodd tried to prevent this madness with an amendment last month and it was stripped out during negotiations. Then the White House planted anonymously-sourced stories yesterday that got the facts exactly backward - accusing Dodd of being the one pushing for the bonuses to be paid. Was it done on purpose? Was it just disorganization and/or incompetence?

Dan, I think it is the opposite problem here. Geithner didn't do what the Wall Street Bankers wanted and that's why everyone wants him gone. They expected him to dump loads of cash on them and give them everything they wanted and he isn't and didn't.

When he was first announced, he was a great pick and everyone was happy, then they found he was going to be strict with them and it was different and that changed things.

Obama will make it very clear why AIG continues to take our money and pay it out to their failed banksters: Because he says they can. After all, he is The Unitary Executive and as such can unilaterally make decisions without consultation with the American people, their representatives, or the courts. Being King is gooooood.

A fundamental characteristic of corporate ownership is that ownership is one thing, control is another. Whether there's 100 million stock holders, or just one, and even if that one is the federal government, control is established when the management group is replaced by one more palatable to the majority of stockholders.

So, without nationalization or receivership, or a move within the corporate bylaws to replace the management group, AIG and every other corporation involved in this mess will continue to be run by the same people who got us here. Period.

Another thing. It's easy to chant that the stockholders in these institutions should take a bath, become the victims of hte risk they assumed, except that many of those investors are, ultimately if not directly, pension funds and other entities that would lose the ability to meet their obligations to "regular" retirees throughout the nation if the investment became worthless.

All that being said, I agree that the president is too beholden to Wall Street, and that the principal architect of this fealty appears to be Tim Geithner. I don't believe that anyone in the discredited pantheon of Wall Street financial wizards will believe that real change is being demanded, and is in the works, so long as Geithner continues to preside over the Treasury.

Obama promised change. And one thing that is going to have to change, no matter how difficult the process, is acceptance of and obeisance to the so-called free market culture that has been taught for at least a generation in the most prestigious business schools in the nation: a toxic combination of Milton Friedman, Ayn Rand, and Peter Kropotkin.

A major factor holding the administration back is the length of time it has taken President Obama and his team to staff the Treasury Department.

All across the government a similar scenario was repeated -- Cabinet secretaries were announced and confirmed with fanfare, with sub-Cabinet jobs filled on an acting basis by career civil servants. Obama got himself credit for moving faster than Clinton or the Bushes, This was fine for his control of one or two news cycles, but Treasury has been the critical department of the government since well before the election, and Sec. Geithner still oversees subordinates who will not be permanent, know it, and must be tempted to recommend only modest deviations from what Treasury's policy was before Obama even took office.

Personnel is policy in Washington. Obama needs to move faster to get his Treasury Department to full strength. Arguments for various changes in direction with respect to major banks may or may not have merit, but any new policy will be implemented less effectively by an understrength department.

Where is the strong regulation we need. No one, Obama, Geithner, the Fed, Republicans in Congress, Democrats in Congress etc, is proposing strong regulation. Back in the late 70s our leaders started unraveling the Depression era regulation that had maintained a stable financial sector for 40 years. Since that began, and has accelerated, we have seen one financial crisis after another based on banks, credit unions or savings and loans exploiting the holes created.

The other thing we need is to tie salaries of elected officials to median income. Then they might start caring about regular people more than their donors.

Why, that's socialism Froomkin !!! Want to be labeled a Facist, like DeLay tried to label Obama on the Chris What's his name show a few days before the election last year ?

Yea, these are extra ordinary times requiring decisive action yesterday. It's too bad Congress is one of the third branches of government, ain't it ? We should divert the constitution on this deal so we can win this economic war, or not. How about this, "We will not relent until AIG is completely absorbed". Or, "See we are fighting AIG on Wallstreet so we don't have to fignt them on Mainstreet". Or better yet, "We must maintain constant viligance against economic oppression". It's all good, no ?

Gosh, were is my bailout, all I asked for was a natural gas propelled tractor, peanuts my boy, peanuts. Yes, I do have gas.

sovine08, are you sure that you know who REALLY order and organize 9/11? I am sure that you are not. Hands are on trial, but masterminds are still occupying positions on THIS country's top. And, like in antique tragedies, until these (or this) masterminds are (is) well and well-positioned, nothing good would be coming to the country.

The Treasury Department did not try very hard. Of course, the current hea of Treasury, 'lil Timmy Geithner, is a Wall Street insider, a protege of Robert Rubin, an the darling of Goldman Sachs.

Geithner was really a very poor choice on Obama's part. He's too much in cahoots with the Wall Street Biggies...

On top of it, he is a "go-it-alone" cowboy, who has not figured out how to communicate with the Fed (which is very closely monitoring AIG's every decision), and passing along the info to the President. Moreover, Geithner has not been able to staff Treasury properly: many offices are still empty. I can't help but think that Geithner has a serious problem: competent economists should be DYING to work for Treasury. So, why is everyone shying away from Geithner?

Could Geithner actually be a "Manchurian candidate"? Or is he just incompetent and totally devoid of people's skills?

All the yammering by the chatting class about this AIG issue is sort of like predicting the outcome of the World Series in the first inning of the first game. Team A may be ahead but there is still a lot of ball to be played. I think this whole crisis is going to be the platform for much needed regulation of the financial markets that are likely to prevent this tragedy again in the near future. Some will call this socialism but that doesn't really matter. Obama has the support of over 60 percent of the population and he needs to do what needs to be done to fix this problem. It is still too early to write off Geithner. He has been put in a terribly difficult situation and lets see how he deals with these problems over the next 4-6 months. Would you consider it fair if the new leadership at the Post were judged on the basis of their first month in charge. I bet not. Lighten up with the doomsday talk and give the guy a chance.

Finally, someone hits the nail on the head. Not surprisingly, it is Froomkin. The Government could take over institutions like AIG, or let them fail while bailing out any deserving counterparties. Obviously, no one has yet figured out how to bail out the failing financial entity while leaving it private, without getting screwed by the bailee. Obama is now getting it from both sides. The bankers (and Jim Cramer) claim he is depressing stock prices, while the public is screaming for the bankers' heads. Think how much worse this would be if Andrew Jackson had not killed the Bank of the United States, and we were dealing with a single private bank so large that it dominated the entire financial system while simultaneously monopolizing the deposit of Treasury funds.

The first step in dealing with AIG is to explain what AIG did. If I understand the situation correctly, AIG issued "insurance
policies" covering the quality of American
home mortgages for domestic and foreign buyers of these home mortgages. We now face a situation where AIG doesn't have the money to pay these investors for their loses since it now has been proven that the
American home mortgages are not the 5 star
investments the investors were told they were by the various "bundlers" that sold these investments to commercial banks and
Central Banks around the World. Isn't this
the situation ?

American taxpayers must clearly be told that America's National reputation is on the line here and that we as a Nation must clean up the mess with our tax dollars. We
have no other choice.

As to AIG employees involved directly with issuing "insurance policies" covering these bad loans and the financial groups that originated and sold these bad loans around the World, they should be punished with jail time and have their and their family's entire net worth taken from them. I don't support the death penalty though.

In the interest of a little perspective in regard to the current pitchfork and torch attitude, the latest issue of the New Yorker has an article entitled "Madoff and His Models", in which writer Ron Chernow makes the following statement:

In the classic account "The Great Crash", John Kenneth Galbraith
notes that booms always mask many cases of embezzlement, which come to light during the bust. "Within a few days" of the 1929 crash, Galbraith writes, "something close to universal trust turned into something akin to universal suspicion".

While the article specifically relates to Ponzi type schemes, the attitudes exhibited in relation to the prehistoric, egotistic economic attitudes of failing financial firms are no different.

Anyone care to start a poster's pool to wager how long President Obama will stick with Geithner?

All of these points are well and good, but something that's also missing (up to this point anyway) is having Congress pass or restoring New Deal legislation such as Glass-Steagall that re-inserts checks and balances back into the system. Obama also needs to find his own Joe Kennedy for the SEC (and, at this point, I'm thinking that it ain't Tim Geitner)

Please be one of my coworkers getting ready to retire next year who have lost the majority of their retirement.

They have worked their entire lives believing that they were protected by the government of the country they love.

Now they must continue to work hoping they won't get laid off at an advanced age and have to go looking for work.

The actions of the banks should be considered treasonous and criminal. Punishments of the appropriate type should be put into place to keep anyone from ever considering doing business in this fashion again.

People who have been financially destroyed by this must be made whole and those who took the money should be paying dearly.

Mr. President:
We are so disappointed in this administration’s seeming lack of ability to keep its detractors at bay with timely release of accurate information. The Chris Dodd affair reeks of old time messy D.C politics as usual. Mr. President, you ran on the promise that such would not be the case, if you were elected. The facts surrounding the bonus loophole should have been released for public consumption immediately. Mr. President, you had good justification for what you did; so, knowing that the facts were going to come out in any event, it’s reprehensible to us that that this matter was handled in such a slipshod manner. Your detractors hand no weapon. However, as things are presently proceeding, Democrats are not only giving them guns they are loading the guns first and then handing them to their enemies!!!! D.C is not capable of keeping anything secret. K-12 kids know that. What you do in the dark in D.C will in the end come to light. Why isn’t the business of the people conducted in view of this commonly known fact? As things currently stand, this administration looks no different than those that went before.

In order to get beyond the mess that was left by the old Bush administration, you, sir, are going to have to make some decisions and do some things that not going to seem very palatable to a lot of us. However, tell us up front, give us your justifications and take on your detractors before they take you on. The people will support you if you are up front with them. But if you are committing shoddy slip ups by which others can point to as being run of the mill D.C. sleaze, then the people, being angry enough already, will easily be led to the other party. Please, be up front with us in everything, we feel that this is the winning way. Though we feel somewhat battered, pushed around and angry, we still can handle the truth.

When you play catch up, oh by the way, we should have told you and other old D.C tripe, you are playing directly into the hands of those, who are determined to limit you to one term. You are, in effect, helping them make their dream come true. Additionally, the upcoming midterm elections are going to be very difficult for Democrats because of all of these missteps that are being made and are consequently being highlighted 24/7 to an already angry people. Each misstep is being used by the GOP folks to say: “See, we told you so.” We hear it constantly and read about it daily.

"Obama's top economic advisers tell him that's not a good idea." What else would Geithner, Bernanke, Summers and Rubin tell him - they're part of the problem. Obama will not convince the public that Wall Street's course is right.

Dan, I think it is the opposite problem here. Geithner didn't do what the Wall Street Bankers wanted and that's why everyone wants him gone. They expected him to dump loads of cash on them and give them everything they wanted and he isn't and didn't.

When he was first announced, he was a great pick and everyone was happy, then they found he was going to be strict with them and it was different and that changed things.

Giethner has given the banks all they want, Wall Street is not relevant here.

AIG is a funnel to big banks and insurance companies here and abroad..

If Giethner was fair AIG would and should go into bankruptcy court and settle the claims as they should, since they insured junk, the tax payers are making good on those bets 100 cents on the dollar, instead of a few cents on the dollar.

Who Failed On AIG Bonus Deal?
The outrage over the bonus's being paid to AIG employees is palpable but false in congress. The fact of the matter is that when the Stimulus bill was passed in a back groom deal involving Treasury Secretary Geitner, Senator Chris Dodd and the Obama Administration the provision to prevent bonuses from being paid to those companies receiving bail outs was not included. Dodd, Geitner and the White House lackeys are all pointing fingers at the other guy while the Dodd, Geitner and Obama express outrage over this outcome and blame Bush.
Yes folks, its still amateur hour in Washington. We need a head to roll on this one and since it probably can't be Obama, the residents of CT should recall Dodd and Obama should remove the tax evading, apparently naïve Mr. Geitner from his job.